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9:00 AM EST Tuesday, May 27, 2008: The weekend was great. Daughter and husband visited. The French Open started. The weekend was bad. Hayfever season started. I lost at tennis. Most of what I read was "gloom and doom," To wit:

+ The big financials are not out of the woods, despite firing a gigantic 65,000 people. The big problem remains "assets" that got stuck on their books when the markets seized. This year Wall Street lost all its profits (and more) from securitizing good and bad mortgages in recent years. .For more, see Banks Keep $35 Billion Markdown Off Income Statements (Update1) from Bloomberg. For even more, The Credit Crunch Effects Yet to Come from The D&O Diary. Here's a list of some of the things that got Wall Street into trouble:

All are difficult to value, and usually impossible to understand.

CDS - Credit Default Swap

CDO -- Collateralized Debt Obligation.

CLO -- Collateralized Loan Obligation.

CMO -- Collateralized Mortgage Obligation.

CMBS -- Commerical Mortgage Backed Security.

MBS -- Mortgage Backed Security

SIV -- Structured Investment Vehicle.

SPE -- Special Entity. Enron had many of them.

Further gloom and doom:

+ Car makers, airlines, truckers et al. are hurting because of the gas runup. For car makers, sales of pickups and SUVs (their most profitable lines) are falling off a cliff.

+ Restaurant companies aren't doing well. Eating out has suddenly became very expensive, what with gas over $4 a gallon -- it's more than twice that in most parts of Europe.

+ The solar stocks (including my favorite short, First Solar) have their problems. From Deutsche Bank this morning:

Fundamental: we expect an oversupply dynamic to emerge later in 2009 We maintain a long-term bullish stance on the solar PV industry, but anticipate that over the next several years the industry will lurch through periods of substantial volatility. We expect adequate silicon supply to enable enough module production to precipitate an oversupply situation. Consequently, we anticipate the present supply shortage will revert to a module overcapacity dynamic beginning most likely in 2H09, in which the industry will flirt with oversupply for up to a few years.

Industry: we expect an industry shakeout to begin later in 2009 We expect this oversupply dynamic will initiate a "shakeout" of sorts within the solar PV industry among both public and private companies starting later in 2009. This is our best estimate on timing; it could begin modestly later. We believe this will be a strong, long-term positive for the overall industry, but could cause a great deal of trouble for individual companies, and will initiate a period of consolidation.

There is good news.

+ Though there are hiccups in base metal prices, demand from China and India remains strong and the long-term outlook for Australian miners looks good. Present favorites include Pan Australian (PNA), Equinox (EQN), Oxiana (OXR), Aditya Birla (ABY), and Zinifex (ZFX).

+ Food does well. High-priced stocks include Potash Corp. (POT), Syngenta (SYT), Monsanto (MON), Deer (DE) and Mosaic (MOS).

How Thinking Costs You. This came from Sunday's Washington Post. It argues investors (like you and me) are stupid. Putting our miserable money into straight index funds makes more sense. The article is subtitled:

Behavioral Economics Shows That When It Comes to Investing, People Aren't That Smart

Four months ago, judging myself to be the next Warren Buffett, I logged on to my Charles Schwab account and did something that in hindsight was astonishingly stupid, even for my own very long roster of financial screw-ups. I clicked over to the trading page and bought shares of Citigroup.

The company, like most of the big Wall Street banks then staring down the subprime meltdown, was limping along. The headlines were bad. The chatter on CNBC was pessimistic. I saw a bargain. I saw a company whose credit card bills and offers show up in millions of mailboxes every day. Just as soon as the banks got their write-offs out of the way, optimism would return to the sector. There would be more buyers of the stock than sellers. I would profit.

Now here I am today: My investment is down 22 percent. And I'm still holding on to the stock. Am I, as my wife and closest friends sometimes insist, the dumbest man walking the Earth?

"You are human," said Russell Fuller, chief investment officer of Fuller & Thaler Asset Management in San Mateo, Calif. His firm uses behavioral economic theories of Nobel Prize winners and university economists to profit from the mistakes made by everyday investors and the pros on Wall Street. Humans, no matter how hard we try, act in ways that cause us to make the wrong investment decisions almost all the time.

We are -- as I was four months ago when I logged on to my Schwab account -- absurdly overconfident about what we think we know. We are -- as I am now -- reluctant to part with our losers, even though the tax code rewards us for doing so. We sell winners too soon, then we buy stocks that perform worse than the ones we sold. We get anchored on certain opinions about stocks and react too slowly to information that should change those beliefs. We believe things will happen based on how easily we can think of recent examples. (A hurricane just hit. Another one will come soon.)

The world of the behavioral economics, which melds psychology, finance and emotion, seeks to explain and sometimes exploit why we do what we do when it comes to investing. It is a field that has become more accepted lately, particularly since 2002, when Princeton University psychologist Daniel Kahneman was awarded the Nobel Prize in Economics for, as the Swedes put it, integrating "insights from psychology into economics, thereby laying the foundation for a new field of research."

Kahneman is a director at Fuller & Thaler, a firm whose other namesake is Richard Thaler, a prominent University of Chicago behavioral economist and a frequent collaborator with Kahneman. Two of the funds the firm manages that use behavioral methods have beaten Russell benchmarks from their inception through the first quarter of this year. Not surprisingly, Fuller & Thaler is not the only firm using such techniques. Firms ranging from J.P. Morgan to AllianceBernstein say they seek to capitalize on the faulty investor mind.

For instance, Fuller & Thaler likes to pay close attention to analysts who may be anchored on a stock, not raising their earnings-per-share estimates enough even though positive information has come out about the company. Fuller & Thaler's investment team pounces before the analysts realize they were wrong. As Kahneman said in an interview, "I think that betting on mistakes of people is a pretty safe bet."

Good for them. My interest in talking to the likes of Kahneman, Thaler and other behavioral economists and personal finance advisers -- besides confirming that I am not dumb -- was to understand these mistakes and what there is to do about them. "I don't think you can fix what's in your head," Thaler said. "What you can do is train yourself to say, 'This is a risky situation, and this is the kind of situation where I get fooled.' "

I asked Kahneman what fools us most frequently. That was simple, he said: overconfidence. "It's the idea that you know better than the market, which is a very strange idea," he said. "Individual investors have no business at all thinking they can do better."

Why do we? "It's because we have no way of thinking properly about what we don't know," Kahneman said. "What we do is we give weight to what we know and then we add a margin of uncertainty. You act on what you think will happen." That's what I did by buying Citigroup. But Kahneman added, "In fact, in most situations what you don't know is so overwhelmingly more important than what you do know that you have no business acting on what you know." Oops.

Barbara Warner, a financial planner with Warner Financial in Bethesda, said she sees a lot of overconfidence among two groups of people: relatively new investors to the market (me), particularly recent business school graduates (not me), and retirees (never, with my investment sense). The latter group can be exceptionally frustrating. "Now they have entirely too much time on their hands to devote to CNBC and Money magazine," she said. "People suddenly think they are smarter than they used to be because they have more time to pay attention to it."

That's a disastrous situation, Kahneman said: "The more closely you pay attention, the more you do things. And the more you do things, the worse off you will be." For proof, he pointed to groundbreaking research done by one of his former students, Terrance Odean, now a professor at the University of California at Berkeley. Odean has written that "overconfidence gives investors the courage of their misguided convictions."

He has gathered trading records from discount brokerage houses for hundreds of thousands of investors, and in several published studies, he has shown that when people had a choice of two stocks to sell, more often than not they sold the stock that did better in the future and held on to the one that did worse. And when they bought something new, they tended to buy a stock that did worse than the stock they just sold. As Kahneman once told Odean, "It is expensive for these people to have ideas."

It is particularly curious when investors hold on to losing stocks, as I have done with Citigroup. This is a function of something called loss aversion, a discovery that helped Kahneman win the Nobel Prize. Thaler, Kahneman's close colleague, put it this way: "Loss aversion refers to the fact that we're wired in such a way that losing money hurts more than getting money feels good." So let's say a hundred bucks falls out of my wallet, lost forever. Under loss aversion, this hurts a lot more than it feels good to find $100 that somebody else lost.

When it comes to trading, this helps explain why we would want to hold on to losers. Selling the loser, even though it gives us a tax write-off, causes us to admit we have lost. So we do something that makes us feel better: We sell the winners. This feeds our overconfidence. But as Odean's research has shown, we often sell winners that still have some winning to do. That puts stocks with upward momentum on the market for less than they are really worth long-term, allowing savvier investors to snap them up.

"What I believe is that individual investors probably as a group create the dynamics by which they lose money and institutions make money," Odean said. "They create mispricings."

Along with several co-authors , he has published a somewhat depressing study about just how much wealth can be lost by everyday investors just because they trade. Looking at data from every trade made by all investors in Taiwan from 1995 to 1999, Odean discovered that the "aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points," which includes trading costs. If investors had simply bought the index and not traded at all, they would have done about 3.5 percent better. The amount of money lost was equivalent to 2.2 percent of Taiwan's gross domestic product.

So what should mere humans do about all of this?

Like most things human, it depends on which one you ask. Odean said he saw two options: Be dumb and let others make money off you, or just buy a no-load index mutual fund and stop focusing on beating the market. Kahneman said there was no one-size-fits-all advice, but he liked the idea of having one sure thing and one long shot. The personal finance planners say investors should stick with them -- they get paid to understand this stuff, and to win. Of course, they are humans too, which means they could be prone to the same problematic behaviors.

As for me, I'm taking some responsibility for myself, which is probably where everyone should start. Earlier this week, I logged in to my Schwab account. I sold my Citigroup shares, at a loss. I'm going to push the money into an index fund. The move felt bad, no doubt about it. I didn't fix what was in my head, but I did fix what my head had done.

Good news for commercial real estate. This is New York's GM Building. It's on Fifth Avenue and 59th Street, a prime location.

Harry Macklowe bought the building in 2003 for $1.4 billion. Observers commented he grossly overpaid at the time. But the real estate boom was in full glory and Harry Macklowe is one of New York's leading real estate gamblers. He gambles prices will always rise. Recently he ran into financing problems. He couldn't get long-term loans to pay off his short-term loans which came due. He's just sold the building in what has to be called "a fire sale" for $2.9 billion. That's an ROI of 15.7% from 2003. Which -- as they say in Australia -- is better than a slap in the belly with a cold fish.

Sell short what they recommend.

Dear Harry:

Listened to a long cold call about Supergen SUPG yesterday - didn't hang up because of reading your funny comment that 100% of your cold call recs have lost money and you should have shorted them. This stock sure has lost a lot of money over the past few years, but the backstory was a good one. Anyway, I enjoy your blog and am passing this along to you as you requested.

Sincerely,

Claire Becker

Other hot brokerage stocks (ones that have been pushed on me) including Sandridge Energy (SD), Sigma Designs (SIGM), Pharsight Corporation (PHST),

How MIT scientists will save us: MIT writes: "As the economy appears to falter and as more Americans fear that the country is on the wrong track, here's something to keep in mind: There is hope on the horizon. History is filled with examples of how technology helped usher in new eras of prosperity." For areas MIT likes, see yesterday's column.

The French Tennis Open started this weekend. Watch it in high definition (HD). The quality is mind-blowing. HD is the only way to watch sports. The Tennis Channel is 455 on Time Warner Manhattan and 217 on DirectV. ESPN is 209 on DirectTV and 29 on Time Warner. Your channels will be different.

Mexican Oysters
A big Texan stopped at a local restaurant following a day roaming around in Mexico. While sipping his tequila, he noticed a sizzling, scrumptious looking platter being served at the next table. Not only did it look good, the smell was wonderful. He asked the waiter, "What is that you just served?

The waiter replied, "Ah senor, you have excellent taste! Those are called Cojones de Toro, bull's testicles, from the bull fight this morning. A delicacy!"

The cowboy said, "What the heck, bring me an order."

The waiter replied, "I am so sorry senor. There is only one serving per day because there is only one bull fight each morning. If you come early and place your order, we will be sure to save you this delicacy."

The next morning, the cowboy returned, placed his order, and that evening was served the one and only special delicacy of the day.

After a few bites, inspecting his platter, he called to the waiter and said, "These are delicious, but they are much, much smaller than the ones I saw you serve yesterday."

The waiter shrugged his shoulders and replied, "Si, Senor. Sometimes the bull wins."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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